Business | Markets
Rate cut unlikely as inflation shoots up to 16-year high
British inflation shot up to a 16-year high in August, making it harder for the Bank of England to cut interest rates to ease the economic pain of what many are describing as the worst financial market crisis in a generation.
- Reuters
- Published: 23:52 September 16, 2008
London: British inflation shot up to a 16-year high in August, making it harder for the Bank of England to cut interest rates to ease the economic pain of what many are describing as the worst financial market crisis in a generation.
Global stock markets tumbled for the second day running yesterday, spooked by this week's collapse of investment bank Lehman Brothers and insurer AIG's ongoing battle to survive.
Shares in HBOS, Britain's biggest mortgage lender, fell more than 25 per cent as interbank lending once again all but halted more than a year after the global credit crunch first entered the popular lexicon.
Extra funds
The BoE threw an extra £20 billion ($35.7 billion) into the financial system to ease the strains, but the cost of borrowing sterling funds for just a day jumped more than a percentage point to its highest level since April 2001.
In a letter to the government explaining why prices were rising so fast -the BoE's inflation target is 2 per cent - Governor Mervyn King said policymakers would keep the market turmoil in mind at their next rate-setting meeting.
But economists said there was little to suggest that the BoE was about to cut interest rates after soaring utility bills pushed inflation to 4.7 per cent in August, its highest since 1992.
King said he expected inflation to go higher still and stay above the target well into 2009.
"Because the peak in CPI inflation is expected to be higher than three months ago, the risk that it may have an effect on other prices and other costs is now greater," King wrote to finance minister Alistair Darling.
"For that reason, the (monetary policy) committee has become firmer in its belief that a period of muted economic growth is necessary to dampen pressures on wages and prices and return inflation to target."
Recession risk
The British economy already failed to grow in the three months to June for the first time since the slump of the early 1990s, and most economists expect output to fall outright in the second half of the year.
House prices have fallen by more than 10 per cent in the last year, consumer confidence has crumbled and thousands of people are expected to lose their jobs in the construction, retail and banking sectors.
Around 5,000 people worked in Lehman Brothers' London office alone.
"Prior to this weekend, we had reached a situation where the UK was expected ... to see a mild contraction in GDP over late 2008, followed by an anaemic recovery in 2009," said Malcolm Barr, economist at JP Morgan. "The events of the weekend and (Monday) intensify concerns over the ongoing tightening in fin-ancial conditions."
Share this article
More from Markets
More from Business
Popular in Business
-
General
Precious jump
Gold prices at new high as India's central bank buys $6.7b worth of gold
Business Editor's choice
-
UAE companies in full force at WTM
Seventy-eight participants are from Dubai and 50 from Abu Dhabi
-
DIFC committed to high standards
Ensures an efficient process to serve the business community
-
Sweet life in the Middle East
A sweet look at the confectionary industry in the UAE and Middle East
